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5 Ways To Prepare For The Worst

Anyone who reads my Collectives regularly will know I’m an optimistic investor. I mean, in recent weeks I have been:

  • Cheering on dividend hikes averaging 8% within the FTSE 100
  • Backslapping savvy Vodafone investors about their £54bn jackpot
  • High-fiving ace Fool investor Charly Travers about his Sports Direct report
  • Revelling in new rules that allow 1,333-baggers such as Asos within ISAs
  • Boasting about my success with small-caps such as Active Risk and M Winkworth
  • Getting ready for a Fool office conga to celebrate FTSE 7,000

And I’m not alone in party mood.

Things must be looking up if these guys say ‘buy stocks’

In particular, renowned fund manager Richard Buxton may have been at the punchbowl too long this month when he claimed the FTSE 100 could reach 7,300 next year. According to the Evening Standard, the Old Mutual stock-picker said: “There is a growing sense out there that the financial crisis is coming to an end.”

Not to be outdone, the party-going boffins at Citigroup have just this week slapped a target of 8,000 on the FTSE by the end of 2014. According to the Guardian, the bank’s experts cite “1) better macro, 2) better earnings, 3) rising risk appetite” for staying bullish on equities over the coming 12-18 months.

However, perhaps the greatest bout of punchbowl excess may have been suffered by the perma-bears at MoneyWeek who shocked me the other day when they sent an e-mail with the headline “Why you should be investing in stocks right now”.

Crikey, things must be looking up.

And with Helicopter Ben still pumping money into the American economy and helping the Dow reach record highs this week…
…the FTSE music keeps on playing and I for one am still dancing.

Pessimists always look stupid at the top

I know what some of you old market hands are thinking right now – all this talk of celebrations and dancing signals a bonkers market about to hit big trouble.

I mean, surely it’s always best to buy shares before the market party gets going… and not when everyone is already sozzled at the punchbowl and competing to give the most ambitious forecast.

In fact, I bet some party-poopers will tell us revellers that we should quickly call it a night. They’ll probably reel off reasons such as these:

  • Verizon’s $130bn bid (1): Mega-deals always herald market tops, with Vodafone/Mannesmann, Royal Bank of Scotland/ABN Amro and Rio Tinto/Alcan being textbook examples. Sell!
  • Verizon’s $130bn bid (2): The deal involves a $49bn bond sale, almost triple the previous record. It’s a last-gasp panic for cheap loans before QE ends, rates increase and the bond market crashes. Sell!
  • Flotation fever: Property floats indicate it’s time to exit the housing bubble, with Countrywide, Crest Nicholson, Foxtons and Zoopla having taken the plunge or planning to do so. Sell!
  • Frothy growth valuations: Blue-sky AIM stocks Nanoco, WANdisco and Blur have markets caps of £386m, £247m and £129m respectively, yet have sales of less than £5m. Sell!
  • Cash is trash: Bearish investment trust Personal Assets Trust is nearly 50% in cash and shareholders are calling it “spectacularly dreadful”. Pessimists always look stupid at the top. Sell!

Five ways to prepare for the worst

I’m an optimistic investor, a market dancer and a punch drinker. I’m also a realist. I know bull markets climb a wall of worry. Yet the path is never smooth and there’ll be upsets along the way. So let me say this: the bears could be right.

This year alone the FTSE 100 has surged from less than 6,000 to more than 6,800 – only then to ‘correct’ to almost 6,000 before rebounding to about 6,600. And I did not foresee any of that. Truth is, nobody did.

You see, nobody really knows what the future will bring. Not me, not Helicopter Ben, not Mark Carney, not George Osborne, not Warren Buffett, not Neil Woodford, not Richard Buxton, not Charly Travers.

All we can do as ordinary investors is invest sensibly and hope for the best… but be prepared for the worst.

And I always like to be prepared for the worst, just in case the punch runs low and this market becomes a bit too rowdy. I do so in five ways:

  • By steering clear of speculative investments
  • By keeping a healthy cash balance
  • By concentrating on a watch-list of high-quality companies
  • By buying only at attractive valuations
  • By selling when companies become overvalued

Right now my portfolio is devoid of any blue-sky pipedreams and has cash on hand to pick up bargains.

I’ve also trimmed some of my winners that have looked a little toppy. Everything else I own looks fairly valued and is dancing higher with the market.

So if we are near the top, I think I’ll perform better than most.

There’s always somebody, somewhere, who’s enjoying strong gains

And just in case you thought this market’s best gains have been and gone and the party has wound down, just look at how these shares have performed since the FTSE peaked in May:

  • Premier Foods +117%
  • SuperGroup + 51%
  • ITV +34%
  • National Express + 28%
  • Betfair +26%

Just goes to show there’s always somebody, somewhere, who’s enjoying strong gains and partying hard.

And if those boffins at Citigroup are correct about FTSE 8,000, there’s plenty more market partying to be done.

I’ll see you at the punchbowl.

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> Maynard owns shares in M Winkworth. The Motley Fool has recommended Vodafone.